State and Local Tax Impacts: Federal Tax Law Updates

Although the One Big Beautiful Bill Act (OBBBA) is a federal law, it is reshaping state taxes across the country.  Since most states incorporate the federal tax law in some manner (whether by fixed-date, rolling or selective conformity), any federal change has the potential to shift state tax policies (and budgets) in a meaningful way.

As states grapple with budgetary pressures resulting not only from OBBBA but also from economic pressures, taxpayers should expect to see more technology-enabled enforcement and new policies aimed at raising revenues. Taxpayers should also closely monitor relevant states’ conformity to OBBBA, expanded income tax nexus standards particularly for online activities and the states’ reaction to tariffs and digital goods.

IRC Conformity Drives State Treatment

While most states use federal taxable income as their starting point, if and when they adopt OBBBA hinges on how they choose to conform to the IRC.

• Rolling conformity: States automatically conform to the current version of Internal Revenue Code (IRC) updates automatically, however, many will have state specific adjustments.
• Fixed-date conformity: States adopt the (IRC) as of a specific date and must pass legislation to adopt federal changes.

For 2025 filings, this means many of OBBBA’s marquee business items may be recognized at different times, or not at all, depending on the state.

Practical impacts include:

• Bonus depreciation/QPP: Taxpayers should expect most states to maintain their historical position to bonus depreciation, with some decoupling entirely and others allowing some form of accelerated deductions.
• Section 174 (R&D): Retroactive expensing for tax years 2022-2024 may trigger state amended returns as well. Taxpayers should be aware of the state reporting timelines (e.g., 30, 60 and 90-days after the filing of an amended federal return). Partnerships may experience added complexity due to the reporting requirements under the centralized partnership audit regime which states may or may not adhere to.
• Section 163(j): Although the federal interest expense limitation will increase under the new EBIT calculation, taxpayers will still need to prepare a calculation using EBITDA for those states that do not have rolling conformity (or have a state specific modification).
• International: If your company has a global footprint, you should carefully evaluate the foreign-related income categories updated under OBBBA. Many states have historically excluded global intangible low-taxed income (GILTI)/foreign-derived intangible income (FDII)-type items, but new labels don’t guarantee the same state result.

Planning point: Make sure to carefully evaluate any material changes resulting from OBBBA on a state-by-state basis to avoid unexpected outcomes. Consider building a state conformity matrix based on your facts and state filing footprint. When modeling cash taxes and state tax expenses, be sure to account for any state modifications that could create swings in your estimates.

Nexus Expansion and Audit Risk

Not only did OBBBA fail to broaden the protection of Public Law 86-272, but states have continued to narrow the shield for sellers of tangible personal property. Several states, including New Jersey, Massachusetts and New York, have implemented laws that mirror guidance given by the Multistate Tax Commission (MTC), which suggests that certain internet-based activities (e.g., customer support chat, post-sale assistance, job postings for non-sales positions, cookies that serve non-solicitation functions, etc.). Simultaneously, states continue to scrutinize and enforce sales and use tax nexus.

• Income and franchise nexus: Expect wider adoption of guidance treating certain internet activities as beyond mere solicitation. Remote teams, in-state contractors and onsite service visits can independently create nexus.
• Sales and use tax: States are doubling down on economic nexus threshold enforcement impacting remote sellers, local jurisdiction reporting and taxability changes. Cloud and software as a service (SaaS), digital products, information services and online education are frequent audit targets.
• Enforcement posture: Revenue agencies are deploying analytics and artificial intelligence (AI) to find non-filers, trace marketplace activity and compare exemption certificate data.

Planning points:

• Refresh your state and local tax nexus evaluation annually, more often if the business is expanding into new states.
• Evaluate the specific functions of your website, apps and cookies to determine whether any activities exceed solicitation.
• Review and align contracts and statements of work to avoid unintentionally triggering service-based nexus in new jurisdictions.
• Strengthen exemption certificate compliance by tracking expirations and storing certificates in an organized, audit-ready system so you are prepared when a state initiates an audit.

SALT Workarounds and Pass-Through Strategy

While the federal SALT deduction cap remains in place for individuals, OBBBA did not limit deductibility of state taxes for pass through entities. As such, the PTET election available in over 35 states continues to provide a benefit to taxpayers by shifting the state taxes from the owners (who face the federal SALT deduction cap) to the entity itself (where it’s generally deductible). Even better, some states are enhancing these PTET programs for 2026 and beyond.

Planning points:

• Entity-level math: Be sure to model out any potential PTET elections, carefully considering the impact to the owners’ state taxes (including resident state tax credits) to avoid double taxation.
• Interaction with qualified business income (QBI): Don’t forget to factor in the reduction in QBI when evaluating the potential benefits of PTET elections.
• Partners/shareholders: Ensure PTET credits are properly reflected on Schedule K-1 equivalents and that any state returns reflect owner-specific limitations.
• Cash flow: Carefully consider the cash flow needs of the company as PTET elections may require the entity to outlay cash sooner than if the tax were to be paid by the individual.

Indirect Taxes: Tariffs, Digital Goods and Local Complexity

States are increasingly pursuing revenue in areas that track closely with economic activity, creating new exposure for multistate businesses.

• Tariffs and surcharges: Many states treat separately stated tariff surcharges as part of the taxable sales price, even when itemized on the invoice or billed after the sale. Whether your company is the importer of record can influence the tax outcome and may offer a planning opportunity to reduce the tax liability.
• Digital expansion: Expect continued expansion of taxability for SaaS, platform as a service (PaaS), infrastructure as a service (IaaS), data processing, information services and online education with inconsistent definitions and treatment across states and local jurisdictions.
• Local intricacies: City and special district rules, home-rule filings and varying sourcing methodologies (origin, destination or hybrid) create added compliance complexity and increase audit risk.

Planning point: Update billing systems to properly tax ancillary charges. Map digital offerings to each jurisdiction’s definitions. Remember to audit your product taxability matrix at least annually.

Key Takeaways

• Conformity drives outcomes: Build and maintain a state-by-state matrix for bonus/QPP, Sections 174 and 163(j) and international items.
• Nexus keeps widening: Internet functionality, remote work and service activity can trigger income and sales tax exposure.
• PTET still offers relief but model it: Coordinate PTET elections with QBI, residency and composite filings to avoid surprises.
• Indirect tax is expanding: Tariffs, digital goods and local rules are active revenue levers. Update systems and certificates accordingly.

As states respond to federal changes, taxpayers will continue to face growing complexity for both direct and indirect state taxes. Weaver’s state and local tax team can help you assess your exposure, model the state-by-state impacts of OBBBA and plan ahead. Contact us today to discuss a tailored state impact model built from your current footprint and upcoming business plans.

©2025

Federal Tax Law Updates Series

Weaver’s Federal Tax Law Updates series explores key provisions of recent federal tax legislation and the implications for businesses and individuals. From depreciation and R&D expensing to energy incentives and state conformity, the series highlights what taxpayers should know to plan effectively in the evolving tax landscape.

• Business Tax Provisions: Federal Tax Law Updates
• R&D, Depreciation and Interest Deductions: Federal Tax Law Updates
• Energy Tax Credits and Incentives: Federal Tax Law Updates
• Individual Tax Provisions: Federal Tax Law Updates

Additional Resources

The Tax Navigator is a comprehensive insight hub for updates on tax policy, planning and legislation. The following videos hosted by Sean Muller, Weaver’s partner-in-charge, specialty tax services, feature updates related to the federal tax legislation and trending topics mentioned in this blog.

• The Tax Navigator: House Passes Tax Bill — May 22 Update
• The Tax Navigator: June 10-17 Update
• The Tax Navigator: OBBBA Passed and Signed — June 30-July 6 Update
• The Tax Navigator: State and Local Tax Deductions in the Tax Bill — July 9 Update